What Is a Bitcoin IRA?
A Bitcoin IRA is a self-directed individual retirement account that enables you to hold alternative investments. The name is often a bit of a misnomer, as most Bitcoin IRAs allow you to hold much more than just Bitcoin. At its core, a Bitcoin IRA is a self-directed IRA arranged to hold cryptocurrencies, and oftentimes, precious metals or even real estate.
How Does a Bitcoin IRA Work?
For the most part, there is little difference between a Bitcoin IRA and other IRA. The main difference is the type of assets held in the account.
Bitcoin IRAs are retirement accounts designed to hold cryptos and potentially other non-traditional assets. You cannot withdraw from the account before retirement without paying a penalty. However, you reap the tax benefits of the corresponding type of IRA you open. Bitcoin IRAs come as traditional IRAs, Roth IRAs, and SEP IRAs.
While Bitcoin IRAs come with the same tax benefits as regular IRAs, they also come with the same limitations. Annual contributions are capped at the same limitations. In 2021, the contributions limits were $6,000, or $7,000 for those 50 and older.
The main differences between Bitcoin IRAs and regular IRAs is the self-managed nature of a Bitcoin IRA and the fee structure. Unlike common IRAs that are managed by the IRA provider, the account owner of a Bitcoin IRA is responsible for all financial decisions. Furthermore, since Bitcoin IRAs are more expensive to operate, they normally have a different fee structure.
Invest In Crypto for Retirement
What Is the Difference Between a Bitcoin IRA and a Cryptocurrency IRA?
As stated above, “Bitcoin IRA” is a bit of a misnomer. Due to Bitcoins popularity, by market capitalization and brand recognition, the term “Bitcoin IRA” helps define this new type of retirement account.
Many Bitcoin/Crypto IRA providers will use the two terms simultaneously in order to communicate more effectively with audiences of varying crypto knowledge. But in terms of account functionality, there is no difference between a “Crypto IRA” and a “Bitcoin IRA.” Both receive the same benefits afforded to IRAs.
Why Invest in Bitcoin and Other Cryptocurrencies?
Many factors lead people to invest in cryptocurrencies.
For most investors using Bitcoin IRAs, one of the goals is diversification. Most people don’t just have a Bitcoin IRA; they have one alongside another retirement account. Cryptocurrencies are young, but are volatile assets with high potential returns for your portfolio. However, compared to conventional assets, they are highly volatile. It is important to know your risk tolerance before investing, but alongside the risk is the potential for reward.
Another draw for cryptocurrencies is that they are a well-defined, long-term store of value. Unlike national currencies, there is a well-defined limit to each crypto’s supply. That makes it impossible for central banks to devalue them (intentionally or unintentionally) through inflation. Many people who worry about governmental incompetence, ultimately leading to the devaluation of national currencies, are drawn to the inflationary resistance of some cryptocurrencies.
Cryptocurrencies are also unique in their relationship with the IRS. It is impossible for the IRS or other government bodies to tax or confiscate cryptocurrencies directly without your cooperation. It’s the sale of cryptocurrencies for fiat currency that triggers a taxable event.
Managed vs. Self-Trade IRAs
Managed IRAs are investments that the account’s owner does not manage. Brokerage firms oversee most IRAs that are not self-managed. As a result, the account owner doesn’t need to make any specific financial decisions after the account is open. This can make life easier for investors, as financial professionals make hard, individual choices on their behalf. The flip side is that the account owner isn’t allowed to make individual trades on their own.
Self-directed IRAs are accounts where the owner directs all the investment decisions. The owner makes the decisions, which are then fulfilled through a custodian or broker. That means self-directed accounts allow much more freedom and flexibility. Of course, it also means the owner has more responsibility.
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The Benefits of Bitcoin IRAs
Several key benefits drive people to invest in bitcoin IRAs.
IRAs provide important tax benefits for when you take your cryptos out of the IRA. Traditional IRAs allow you to place pre-tax income into the account, lowering your taxable income. You then don’t pay taxes until you withdraw during retirement. Usually, your income from withdrawals during retirement will be less than your ordinary income during your working years. So, the result is less money paid in taxes during your lifetime.
Roth IRAs provide the opposite benefit. You pay taxes, then contribute after-tax income to your Bitcoin IRA. In exchange, you do not pay taxes on withdrawals in retirement.
Tax benefits are the greatest financial incentive to IRA investments.
Diversification helps manage risk and reduce the volatility of price changes. Cryptocurrencies are volatile assets, but their prices are ruled by factors separate from most other assets. This makes cryptos an attractive part of a diverse portfolio. You can add a new asset to your portfolio that comes with entirely different risk factors.
Cryptocurrencies are very secure assets but require best-practices for storing them. A proper Bitcoin IRA provider will include best-in-class safety protocols as well as cold-storage for their customers.
Bitcoin and other cryptocurrencies are decentralized. This means that their value is independent of monetary policy set by central banks. This removes single points of failure associated with typical banks and corporations, which makes cryptocurrencies like Bitcoin very antifragile.
Costs and Fees to Consider in a Bitcoin IRA
Opening a Bitcoin IRA and keeping it open comes with a few major costs and responsibilities to keep in mind.
First, there are normally a few fees associated with Bitcoin IRAs:
- Account opening fee
- Management fee
- Trading fees
- Storage fee
Each Bitcoin IRA provider offers its own fee structure. So, it’s essential to look at the costs before submitting an application to open an account.
Then, there are generally minimum investment requirements you must follow. This normally includes:
- An initial minimum investment to open an account
- A minimum annual contribution you must make while the account is open
How to Open a Bitcoin IRA
Opening a Bitcoin IRA is easy. However, you will need to submit an application. During the process, you will need to verify your ID and ensure you meet the requirements set out by the account provider. iTrustCapital is a popular platform where you can allocate retirement funds into crypto assets. The platform supports a growing list of the following coins:
Bitcoin, Ethereum, Cardano, Chainlink, Polkadot, Litecoin, Dogecoin, Bitcoin Cash, Stellar, EOS, Uniswap, Compound, SushiSwap, yearn.finance, Polygon (Matic), Aave, Solana, Curve DAO, Basic Attention Token, Enjin, Algorand, Cosmos, Tezos.
Furthermore, iTrustCapital offers precious metal investments for further portfolio diversification aside from digital currencies.
You can set up an iTrustCapital account rather quickly; you just need to follow a few simple steps:
- Visit their website and create a free account
- Verify your email address
- Follow the steps to complete ID verification
- Choose the IRA account type
- Fund your account with a transfer, rollover, or cash contribution
- Sign your application electronically
- Start purchasing assets you want to be added to your account